Millions of people anticipate the day they will retire—when they can finally engage in the activities they’ve always wanted to do, such as reading, golfing, hiking, traveling, or simply completing a jigsaw puzzle.
Wouldn’t it be amazing to enter that stage of life even earlier than anticipated? While early retirement may not be feasible for everyone, with careful planning and effort, it can be done.
Read the following case study to understand how our team implemented strategies to get our clients to their goal of financial freedom earlier than expected.
Analyzing the Financial Picture
Meet Mr. & Mrs. Jones,(1) your typical hardworking American couple. They were diligent savers and wise spenders, however, they had never received outside advice on their investments nor created any specific strategies to map out their path to retirement.
Their expectations were to retire in 10 years, at the ages of 67 and 65. Through working with this couple and offering guidance, we revealed that they were in stronger financial shape than they realized.
Because they hadn’t received an opinion on their portfolio, they lacked the awareness to know they were actually ahead of the game!
We strategized a plan to fuel them further and faster down the path to financial freedom, allowing them to retire much sooner than previous projections estimated.
This plan included recommendations to modify their portfolio which ultimately led to improvements in their financial situation.
Adjusting Asset Allocation
Asset allocation is fundamental to successful investing. We can think of it as being an essential part of Investing 101. But is asset allocation different for those on the path to early retirement?
Asset allocation, often better known as diversification, is an investment strategy in which you spread your portfolio across several different asset classes.
In doing so, you reduce the volatility associated with any one particular asset class, which generally improves a portfolio’s long-term performance.
With Mr. and Mrs. Jones, we discovered that their 401(k)s and IRAs were invested very conservatively for their age; they also had one account entirely in cash.
We made the recommendation to choose a more suitable allocation which ultimately improved their risk-adjusted expected return profile. This adjustment put them in better alignment with their retirement objectives and other financial goals.
Every investment has costs. Of all your expenses, taxes can sting the most, and take the biggest bite out of your returns.
The good news is that tax-efficient investing can minimize your tax burden and maximize your bottom line—whether you want to save for retirement or generate cash for savings.
Tax-efficient investing involves choosing the right investments and the right accounts to hold those investments. There are two main types of investment accounts: taxable accounts and tax-advantaged accounts.
There are advantages and disadvantages to each, but both are important pieces of creating an effective investment strategy.
In the case of Mr. and Mrs. Jones, we provided recommendations on the share of their savings going into pre-tax vs. Roth accounts. This improved the tax efficiency of their retirement assets so the projected future draw from their RMDs was less while maintaining today’s tax rates.
Know the “Why” Behind Your Goal
Financial stability can enhance your happiness, but only if your monetary objectives align with your values and what matters most to you. Before committing to the ambitious goal of retiring early, it’s essential to reflect on the reason why you want to retire early in the first place.
Suppose a person values working as an employee in a company. In that case, early retirement may not be a suitable goal for them because they thrive on the experience of being a part of a team.
On the other hand, suppose autonomy and adventure are part of their value system. In this case, early retirement may be an excellent goal that allows them to fully live out those values.
This is why we spend a great deal of time discussing values and priorities with clients like Mr. and Mrs. Jones. While numbers and projections are an important part of the discussion, good financial planning goes beyond analytics and spreadsheets.
Understanding the “why” and purpose behind your actions is a critical piece of the puzzle. Your values are the driving force behind identifying goals that genuinely feel fulfilling to accomplish.
Is Early Retirement in Your Future?
The factors and recommendations mentioned above revealed to Mr. and Mrs. Jones that they would be able to retire with increased financial stability in six years (at ages 63 and 61), much earlier than expected.
Because each individual situation is unique, it takes a careful and customized approach to each client’s portfolio and goals to find the ideal path to early retirement. Like Mr. and Mrs. Jones, you may discover that you are closer to financial freedom than you think.
Disclosure: It is unknown whether the listed clients approve or disapprove of the advisor or the advisory services. The criteria used to determine those included in this blog was whether the person was typical of the clients the firm serves.
Neither portfolio size nor performance were used to determine which persons were chosen.
Whatever your situation, our team at Ferguson Johnson Wealth Management can create a retirement strategy that fits your financial needs and helps you retire how you want and when you want.
Whether you have needs similar to the couple in this case study or you’re facing an entirely different situation, we are here to get you closer to your goals.
(1) Names changed for confidentiality purposes.